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Services are defined as, “the act or performance of a firm towards its customers which is essentially intangible and does not result in the ownership of anything” (Kotler and Armstrong 2009). Due to its intangible nature, the manufacturing and delivery of services is more complicated than products (Gaster 2001). Intangibility, inseparability, variability and perishability are the characteristics used to differentiate services from products (Kotler and Armstrong 2009, Parasuraman, Berry and Leonard 1992). Kotler and Armstrong (2009) explain that, due to such a peculiar nature of services, buyers look for something substantial to judge the services. Intangibility is considered as the most important characteristic of the service industry. The customer cannot physically examine or test the service before it is purchased; this makes it difficult for a customer to judge its quality or value. In this case the customer depends on the physical aspects related to the service delivery to assess his judgement of the quality being provided ().

Inseparability as described by Singh and Surujal (2010) and Chang and Chelladurai (2003) on the other hand, refer to essential involvement of the customer in producing a service. This is explored in Chang and Chelladurai (2003) model of a five-fold view of customer roles in service production and delivery. They derive this model based on previous studies on the health and fitness industry; they explain that the customer is involved throughout the production of the service. The role of the customer changes from one stage to another, in the ‘input stage’ they are found as resources, in the ‘throughput stage’ they are found as co-producers and in the ‘output stage’ they play the role of the buyer. Thus it can be assessed that the quality of the service is majorly influenced by the participation (information provided by the customer with regard to what he desires of the service) of the customer (Slack et al. 2007 and Gaster 2001).

Another important characteristic of the service sector is the variability. The quality of the service provided depends on a number of factors, such as, the firm, the type of service, the environment in which it is delivered and to whom it is delivered. All these factors are responsible for the variations of the service provided (Singh and Surujal 2010, Kotler and Armstrong 2009, Parasuraman and Berry 1992 & Slack et al. 2007 and Gaster 2001, Moxham and Wiseman 2009). The same service would change over a period of time depending on the above stated factors.

Perishability is the fourth characteristic which should be considered while distinguishing any service. Kotler and Armstrong (2009) along with Hitt, Black and Porter (2006) state that services cannot be stored or inventoried, thus their perishability becomes difficult to control when demand fluctuates. For example, in a fitness club the swimming pool might experience increased usage during summer and relatively lower demand during winter, thus the services relating to the pool would have to be managed accordingly. Kotler and Armstrong (2009: p 391) stress the importance of providing, “the right service to the right customers at the right place at the right time and right price to maximize profitability”.

It can be understood from the above literature that customers are very important to any service based organization. As they not only participate in producing a service but also consume it. Thus when the services are performed the firm has to take care not to disappoint its customers as they might change their mind about the firm and change preferences (Parasuraman, Berry and Ziethaml 1994). A need of exceptional differentiation from the competition in the market arises out of the need to attract customers.

Service quality

Parasuraman et al. (1988) state that quality is an elusive concept difficult to define. Parasuraman et al. (1985) describe service quality as being a comparison between expectations of the customers and performance of the service. There seems to exist a consensus that service quality should be measured and defined from a customer’s point of view (Lewis and Boom 1983; Gronroos 198 and Parasuraman et al. 1984). Slack et al. (2010 p40) define quality as being consistent to the conformance of customer expectations. They further state that the ability of a customer to judge quality easily and clearly with respect to their specific understanding of the service makes it a major influence for customer satisfaction or dissatisfaction (Gronroos 1995).

On the other hand the definition of service quality as including expectations did not go very well with many scholars. Cornin and Taylor (1994) argue that the expectation measure posed was very predictive since it has not occurred yet. Parasuraman et al. (1994) claimed that the expectation measure could help the management in isolating the areas requiring improvement. They further state that, if the definition of service quality is based on variance of dimensions, then a performance-based measure should prove suitable for creating a scale for service quality. Thus it can be stated, that customer perceived service quality is the quality viewed from a customer’s perspective. It is this customer perceived service quality which a firm needs to acknowledge in order to compete.

Service quality has been in use as a differentiating tool since its conception, to seek competitive advantage in many industries. The competition could be considered aggressive in a service sector industry especially due to its intangible nature (Parasuraman, Zeithaml and Berry 1994 and Tam 2004). They further state, service quality delivery as the single most important element used in determining the choice of a firm by a customer. Researchers have demonstrated that if service quality is executed well then it results in increased profitability both, in market share as well as return on investment (Parasuraman, Zeithaml and Berry 1988, Ennew and Binks 1996, Gupta and Zeithaml 2006, Coelho and Vilares 2010).

Furthermore, Parasuraman, Berry and Zeithaml (1996) distinguished service quality as one of the major elements that has an overwhelming influence over customer retention and long-term profitability of any organization. According to Bodet (2009) the managerial focus has changed from attracting new customers to retaining the old ones. Ferrand et al. (2010) state that customer retention highly depends upon the level of service quality offered at the health and fitness club. They further state that numerous service attributes have a significant impact on the frequency of attendance. Fornell et al. (1987); Moxham and Wiseman (2009) and Sonnenberg (1989) believe that marketing resources are better utilized on retention rather than attraction of new customers. Furthermore, Kotler and Armstrong (2009) state that service quality remains a vital requirement for customer satisfaction. Service quality is arguably the most important element used as a differentiation tool in service management (McDonald & Howland 1998; Woolf 2008). The service quality has to exceed or at least meet the expectation of the customer, in order for him to be satisfied (Slack et al. 2007).

Barnes (2008) and Slack et al (2010) along with Parasuraman et al. (1988) state that service quality if implemented and managed strategically could give the company a great boost against its competitors. Gaster (2001) and Matzler, Renzl and Rothenberger (2006) state, that quality is the only element used by the customers to form a judgement of the service being provided. Matzler, Renzl and Rothenberger (2006) isolate quality as the main influencing dimension over customer satisfaction, customer retention and perceived quality. Customers highly rely on their experience encountered while undergoing the service production and execution. It has been widely researched and synthesized that service quality has to be understood from the customer’s point of view; so that the real perceived quality of the service can be established and implemented.

Customer retention

Calik and Balta () define customer retention or loyalty as the customers continuing patronage towards a firm. Kasim and Souiden () argue that loyalty and intention to repurchase or satisfaction are different constructs, moreover their relationship differs from customer-firm association. Due to the complicated nature of service industry, it is difficult to cultivate an accurate understanding of customer retention or loyalty (Kasim and Souiden). They further state that the choice of a customer in a firm and the continued patronage towards the firm are less obvious in a service based industry, which makes it difficult for organizations to predict customer retention.

Zeithaml et al. () in their research demonstrate that customer retention has a great impact on the profitability of an organization. Riechheld and Sasser (1990) explain that customer defections have a negative impact on the market share value of the organization. This might prove dangerous with regards to competition. In the light of the situation Anderson and Sullivan (1990) state great effort is needed to acquire a customer as opposed to retaining the present customer base. Gronroos (2001) argues that retaining customers is more productive and cost-effective than acquiring new ones. It is more economical to keep an existing customer satisfied; also a satisfied loyal customer is more likely to invest more in the organization as opposed to convincing a new customer to initially invest (Lam et al. 2005 & Lagrosen and Lagrosen 2007).

Relationship between service quality and customer retention

Research in the last one decade has established the fact that perceptions of service quality are directly correlated to retention (Bolton, Lemon and Bramlett 2006). They strongly believe that the experience of service quality holds more weight with retention than any other attribute. In their study of business to business contract renewal found that contract renewal is directly influenced by past experiences. They also found that exceptional quality provided by the supplier to the organisation resulted in increased customer satisfaction and renewal of contract.

Robinson, Ferrand and Valette-Florence (2010) and MacIntosh and Doherty (2007) state that there is a positive relationship between service quality and customer retention. Singh and Surujal (2010) found similar results in their case study conducted in a health and fitness organization based in South Africa. Woodside, Frey and Daly (1989) in their research pertaining to health care industry found similar results. Similarly, a study by Calik and Balta (2006) in the banking industry in Turkey, determines that service quality has a positive effect on the business of small scale banks. The service quality offered resulted in satisfied and loyal customers. But their study was greatly hindered due to the economic crisis the country was facing due to which a large number of banks were liquidated. This study cannot be considered precise due to the uncertainty in the economic condition at the time of the study.

Many argue that service quality is not the only element that determines the customer repurchase decision. Factors such as price and brand image also play a major role. There exist a number of different variables which have an impact on the intention to repurchase (Robinson, Ferrand and Valette-Florence 2010). These variables act as intermediaries between service quality and customer retention. Their presence influences the nature of relationship service quality will have with the firm’s customer retention. It can be argued that the existence and influence of these variables varies from industry to industry (). Rust et al. 1995 in their study acknowledged the fact that these variables are interchangeable.

Hu, Kandampully and Juwaheer (2009), propose a model that establishes a positive relationships between Service Quality and Customer Satisfaction, Corporate Image, Percieved Value; and a negative relationship between customer retention. They devised this model based on the data collected in the hospitality industry (famous hotels in Mauritius). They emphasise that brand/corporate image has more influence over customer retention than service quality. According to Hu, Kandampully and Juwaheer (2009) service quality has no direct effect on customer retention. Service quality reflected in the other variables such as customer satisfaction and corporate image has a effect on retention. This contradicts the findings of Parasuraman, Zeithaml and Berry (1994) who state that service quality has a direct relationship on customer retention.

Similarly, Kasim and Soiden (2007) and Ennew and Binks (1996) demonstrate that brand/corporate image has a direct relationship with the purchase intentions of the customer. This research was conducted in the banking industry in the UAE and UK respectively. They were successfully able to establish that corporate image has a direct impact on retention. Attributes related to corporate image such as, past experiences, impressions, service charges etc hold great value to the customer. One of the major limitations of the study is the relatively small sample which was collected as it showcases to represent the outlook of a country.

Alternatively, Murray and Howat (2002) demonstrate a positive relationship between customer satisfaction, customer retention and service quality. Similarly, Matzler, Renzl and Rothenberger (2006) while exploring the service quality implications on customer satisfaction and retention found that these were positively correlated. Their study was conducted in the hospitality industry of Austria. Coelho and Vilares (), while the return on investment of service quality in the telecom industry, they found that there is a linear relationship between service quality and customer retention.

Customer Satisfaction

Customer satisfaction has attracted a lot of attention in the last three decades in the light that customers are the initial most important source of income. Reichheld 1993 and Heskett et al. (1997) state that customer satisfaction is a required precondition for customer loyalty, which in turn influences profit and growth of the firm. Earlier customer satisfaction conceptualizations revolved around two theories presented by Westbrook (1981) and Churchill and Surpernant (1982) cited by Tam (2004); formerly state, that satisfaction was recognised as a cognitive process of comparing what the rewards were against the cost of those rewards. Tam (2004:p899) further elaborates that customer satisfaction can be defined as, “the emotional response resulting from the cognitive process of evaluating the service received against the costs incurred while obtaining the service”.

A satisfied customer is more likely to return to experience the previous service quality expectation. Moreover, high customer satisfaction concludes in better reputation of the organization also marketing cost for attracting new customers is considerably reduced as the satisfied customers are likely to repeat their experience by word of mouth (Parasuraman, Zeithaml and Berry 1996; Moxham and Wiseman (2009); Lam, Zhang and Jensen 2005; Lagrosen 2001).

Woolf (2008) states that service quality plays an important factor in purchase decision and customer satisfaction. Lam et al. (2005) explain that a satisfied customer is more likely to devote time, energy and money in the organization and be more tolerant regarding price hikes. The health and fitness club revenues depends mainly on the number of memberships cultivated, thus it can be said that customer retention is very integral to the financial growth and development of the club (Zeithaml et al. 1996; Ferrand et al. 2010 and Lam et al. 2005). Chelladurai and Chang (2000) and Lam et al. (2005) illustrate, in case of a health and fitness industry the customer is a part of the manufacturing as well as the delivery of services it is important to evaluate and deliver the expected level of service quality.

Research in the area of repurchase has identified, that customer satisfaction does guarantee retention. A satisfied customer shares the same probability of shifting to a competitor, as any other prospective customer. The idea of retaining a customer is to keep them satisfied by providing exceptional quality and benefits that are matched by none other in the industry (Woodall 2001; Rice 1997; Hoyer and MacInnis 2007 and Gronroos 1995).

Gupta and Ziethaml (2006), summarise the work done in area of establishing positive correlation between customer satisfaction and customer retention. They state that there is a positive correlation between customer satisfaction, service quality, loyalty and intention to repurchase). They also state that there have been many studies based on the combination of these variables and to establish the differentiality amongst them. They also say that satisfaction is a strong indicator for future customer behaviour and financial performance. They cite Mazursky and Geva (1985) findings that satisfaction and intentions to repurchase are highly correlated when measured in the same survey. Thus our survey is going to measure customer satisfaction and retention in accordance with the customer perceived service quality provided. They further state along with Mittal et al (1999) that over a period of time the relationship may increase or decrease. But Ziethaml and Gupta (2006), state that there have been very few studies in this particular area and would need more research before generalizations could be made.

There have been many researchers who have created an industry specific service scale and measured the customer perceived service quality to assess the customer retention intention (). These researchers suggest that every industry is unique and hence needs to be studied separately (Kirkpatrick and Lucio 1995; Hannagan 1998). Furthermore, organizations within industries have different operational strategies and objectives which might have implications on the service quality hence affecting customer retention and satisfaction (Hitt, Black and Porter 2006; Barnes 2008).

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